Undermining the WTO? the Rise of Preferential Trading Arrangements
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A revised version of this paper appear in Building a Northeast Asian Community, Volume II: Economic Cooperation and the Role of Jeju Island (Seoul: Yonsei University Press, 2006). UNDERMINING THE WTO? THE RISE OF PREFERENTIAL TRADING ARRANGEMENTS Vinod K. Aggarwal Director and Professor Berkeley APEC Study Center University of California at Berkeley Berkeley, California 94720-1970 April 28, 2005 Tel: 510-643-1071 Email: [email protected] Paper prepared for presentation at the Third Jeju Peace Forum conference, Building a Northeast Asian Community: Towards Peace and Prosperity, June 9-11, 2005. I would like to thank Min Gyo Koo for his comments and help. Sean Fahle, Christine Koo, and Wendy Qi provided research assistance. I. INTRODUCTION In 1999, World Trade Organization (WTO) participants in Seattle unsuccessfully attempted to launch a new trade round. Many commentators saw this as the swan song of the global approach to negotiations and began to call for alternative modes of trade liberalization. Suggestions for coping with the perceived complexity of the WTO included negotiating among a more restricted set of actors and limiting the set of issues discussed.1 Although such avenues increasingly became the norm, the success of the November 2001 Doha meeting of the WTO in setting a timetable for negotiations seemed to once again restore faith in the global approach. Yet the seesaw continued. First came the dramatic collapse of the Cancún negotiations in September 2003, followed shortly thereafter with the success of the July 2004 WTO meeting in Geneva. WTO members have already missed the January 2005 deadline for concluding the Doha Round. In this environment, many countries continue to look for other trade options in view of the likelihood of prolonged talks before an agreement is reached. In the post-World War II era until the early 1990s, the General Agreement on Tariffs and Trade (GATT) remained the primary approach to trade liberalization, with the most significant exception being the formation and evolution of a customs union in Europe. By contrast, trade protection has taken a variety of forms, with unilateral, bilateral, minilateral, and multilateral restrictions both on a sector specific and multiproduct basis. My objective in this paper is to look at the new trend toward preferential liberalizing trading arrangements around the globe. To this end, Section II of this paper begins by more systematically categorizing the different types of arrangements 1 For an example of those advocating restricting the number of participants, see the Business Roundtable 2001; for an example of an argument for restricting issues, see Tyson 2000. 1 that have increasingly populated the trade landscape. The objective of this exercise is both conceptual and empirical. From a conceptual standpoint, I argue that a more detailed specification of different types of trade accords helps us to clarify what we are seeking to explain. From an empirical standpoint, the categorization allows us to understand the origins and evolution of different types of arrangements. Section III of the paper then presents an institutional bargaining game approach to examine the evolution of trade arrangements. In Section IV, I explore how this approach might help us to understand the implications of the rise of preferential trading arrangements in both Northeast Asia and on East Asia and these might link up to Europe and the United States through ASEM and APEC, respectively. I conclude in Section V with an assessment of the implication of the rise of preferential agreements. II. VARIETIES OF TRADE GOVERNANCE In the post World War II period, states have utilized a host of measures to regulate trade flows. Yet many analysts have conflated different type of arrangements and used them synonymously. For example, the term “regional agreement” has been used to refer to widely disparate accords such as Asia Pacific Economic Cooperation (APEC), Asia Europe Meeting (ASEM), North American Free Trade Agreement (NAFTA), bilateral free trade agreements both in and outside a region, and even sectoral agreements such as the Information Technology Agreement (ITA).2 This conceptual ambiguity and under-differentiation of the dependent variable makes it more difficult to analyze specific outcomes, and thus may impair our theoretical 2 See for example, Mansfield and Milner (1999), p. 592, who recognize the problematic nature of the term “regionalism” but then proceed to use this term in their analysis. See also Bergsten (2001). 2 analysis of trading arrangements. In an effort to more clearly specify types of trade arrangements, I distinguish them along several dimensions: the number of participants, product coverage, geographical scope; market opening or closing, and institutionalization. I define the number of participants in terms of unilateral, bilateral, minilateral, and multilateral participation in an agreement; I use the term bilateral to refer to two countries and minilateral to more than two.3 In terms of product coverage, the range is from narrow (a few products) to broad (multiproduct) in scope. Geographical scope differentiates between arrangements that are concentrated geographically and those that bind states across great distances. A fourth dimension addresses whether these measures have been either market opening (liberalizing) or market closing (protectionist). Fifth and finally, one can also look at the degree of institutionalization or strength of agreements.4 Table 1 develops a typology of trade agreements based on these dimensions but omits categorization of their liberal or protectionist nature and degree of institutionalization for presentation purposes. In addition, my discussion of scholarly work in these various cells omits discussion of protectionist accords and institutionalization, although I do consider these elements in the scenarios of Northeast Asian trade arrangements and their likely evolution in Section IV. 3 This usage differs from that of Yarbrough and Yarbrough 1992 that conflates third party enforcement with these terms so that “bilateral” for them can also mean three countries, a highly counterintuitive use. Keohane 1990 refers to an agreement among three or more states as multilateralism. Richardson (1987) is consistent with my usage. 4 Of these five, the dimension of geographical scope is the most controversial. It is worth noting that this category is quite subjective, since simple distance is hardly the only relevant factor in defining a “geographic region.” In fact, despite the interest that regionalism has attracted, the question of how to define a region remains highly contested. See the discussion by Mansfield and Milner (1997), Katzenstein (1997), Ravenhill (2004), and Aggarwal and Fogarty (2004), among others. 3 I begin by considering product coverage. The narrowest coverage is that of one or very few products, or what is referred to as sectoralism. Although we have seen a number of trade opening measures in this area, it is worth keeping in mind that sectoral approaches in the post-World War II era have been discouraged by GATT Article 24, which requires that free trade agreements or customs unions must cover “substantially all trade.” The exact meaning of this clause has been hotly disputed, and sectoral measures have rarely been challenged in the GATT/WTO. 5 6 Table 1: Classifying Varieties of Trade Governance NUMBER OF PARTICIPANTS Bilateral Minilateral Unilateral Geographically Geographically Geographically Geographically Multilateral Concentrated Dispersed Concentrated Dispersed (1) (2) (3) (4) (5) (6) UK Corn U.S.-Canada U.S.-Japan VIEs ECSC (1951) EVSL (1997) ITA (1997) Law Auto Agreement (1980s-1990s) Few removal (1965) BTA (1998) Products (1846) FSA (1999) Super 301 (1990s) (7) (8) (9) (10) (11) (12) UK (1860s) Canada-U.S. U.S.-Israel FTA EC/EU APEC (1989) GATT /WTO FTA (1989) (1985) (1958/1992) (1947/1995) APEC LOME Individual Australia-New U.S.-Jordan FTA ASEAN (1967) Many Action Zealand (2001) AFTA (under Products Plans CER (1983) NAFTA (1993) negotiation) (IAPs) U.S.-Singapore FTA (2004) Mercosur (1991) EU-Mercosur (under Japan-Mexico negotiation) PRODUCT SCOPE FTA (2004) 5 On this issues, see Frankel (1997) and Ravenhill (in press). 6 Adapted from Aggarwal (2001). 4 Sectoral Unilateralism Cell 1 focuses on unilateral sector specific measures, the classic example of unilateral sectoral market opening being the British opening of its grain market with the removal of the Corn Laws in 1846.7 Although some sectoral opening took place in the twentieth century, a variant of sectoral opening that is tied to bilateral bargaining took place in the late 1980s and 1990s. The United States used Super 301, a Congressionally mandated trade policy instrument, to threaten to close its market to force other countries to “unilaterally” open up their market in specific products. This particular form of sectoralism sparked a heated scholarly debate. Bhagwati and Patrick, for example, dub this unusual U.S. practice as “aggressive unilateralism.”8 Some analysts argue that U.S. efforts at aggressive unilateralism generated positive outcomes by forcing the liberalization of otherwise closed Japanese, European, and other Asian markets.9 Yet Bhagwati and Patrick hold a highly skeptical view of this claim, arguing that pursuit of aggressive unilateralism may spread cynicism toward multilateral commitments and provoke retaliation by other countries. Sectoral Bilateral Regionalism In cell 2, we have sectoral agreements between a pair of countries